Blog Post #8: Vertical Integration

Let's all pretend for a second that we have $100 million. Would you choose to leave that money alone or invest it and possibly double your money or lose all of it? It's a deep question when you analyze what you could gain vs what you could lose. This is the conversation some of biggest companies in the world are having over a strategy called vertical integration.

Vertical integration is a strategy that allows a company to streamline its operations by taking direct ownership of various stages of its production process rather than relying on external contractors or suppliers. One of the earliest examples of Vertical Integration comes from Carnegie Steel Company in the 1890's when they took control of supply, logistics, and shipping. Many modern companies have found success using this strategy including Apple, Amazon, Zara, Tesla, and Netflix.

Some of the benefits to vertical integration include faster production time, more control of your products, and saves the companies money long term. It is very important in any business to be able to get your product out to the market as fast and efficiently as possible. By producing and assembling all parts of the product in house it allows you to know when you should put your product on the market and how much more of certain products you need. Lastly by taking control of all aspects of production you take out third parties who may try to charge you more for parts based off inflation and save you hundreds of millions of dollars down the line.

Some negatives however of vertical integration include the upfront cost companies have to put up to start this strategy, less attention to detail, and increased organizational complexity. When starting the process of vertical integration companies have to invest millions of dollars into acquiring all the parts necessary to successful vertical integration and will not see profit from that investment for sometimes decades. Also now because you are responsible for producing more products it could cause companies to pay less attention to detail on certain products than they would have before. Finally by deciding to vertically integrate you add more operations to your already existing operations and you have to find a way to make it all flow seamlessly or it could mess up operations and ruin the investment. 

Personally I feel that vertical integration is a great strategy for any company. If companies have the money to invest into the strategy and do it right it is a great way to maximize profits years down the line and continue to make more money. It is an investment that companies will make if they truly have the confidence that their business will be successful for multiple decades and allow them to eventually see profit.

So with all of this new information haven been given to you I want to ask you the same question I asked originally. If you had $100 million dollars would you leave it alone or would you invest it with the possibility of doubling your money or losing it all together?